India, Russia continue discussions to resolve payment crisis

With western sanctions disrupting bilateral payments, shipping, and transportation insurance, India and Russia are discussing sourcing from India and payments in third currencies as potential solutions

A model of oil barrels is seen in front of Russian and Indian flags in this illustration taken, on December 9, 2022. | Photo Credit: Reuters

With bilateral payments still not streamlined in the backdrop of Western sanctions, especially for defence deals, India and Russia are set to hold bilateral financial meetings under the framework of the Inter-Governmental Commission in the second half of February as part of ongoing efforts to iron out a mechanism, officials aware of the development said.

“We have agreed on a mechanism and we are fine-tuning it, continuous discussions are on. Enhancing bilateral trade and sourcing from India is one of the discussions, as also payments in third currencies,” an official source said.

Another major issue is transportation, with the challenge of finding cargo carriers— and their insurance— outside the purview of sanctions. Defence sources have expressed concerns regarding this since the beginning of the war in Ukraine. Insurance and reinsurance are under discussion, as well as efforts to avoid cargo ships under sanctions, the source stated. On this, diplomatic sources stated that, increasingly, most of the shipping being used is Russian.

‘Indian banks too cautious’

Speaking at a seminar on Monday, Russian envoy in India Denis Alipov said that vostro accounts have been opened, the mechanism of rupee-rouble trade has been established, and it is now a matter for the banks to use it.

“Many Indian banks are over-cautious. Using this mechanism would not invite any secondary restrictions from the U.S. if that is the fear. But still, banks want to be on the safe side,” Mr. Alipov said, adding that it would take some time for the knowledge that it is not detrimental for Indian banks to sink in, after which a positive expansion of this mechanism would be seen.

Budget documents presented last week show that the Indian Air Force has returned close to ₹2370 crore from the budget estimates to the revised estimates for 2022-23. Official sources said that this was meant for payments to Russia as part of committed liabilities, which could not be completed. Payments for several other defence deals are held up as well, official sources said.

Rupees accumulate in Russia

With Russia being shut out of the global SWIFT system for money transfers, India and Russia have agreed to conduct payments through the rupee-rouble arrangement, after trying the euro as well. However, this has led to an accumulation of Indian rupees in Russian banks, given the large volume of payments. This is where both sides are discussing ways to enhance Russian sourcing from India.

As reported by The Hindu earlier, Russian officials had said last August that, with the new reality, payments for defence deals in US dollars and euros have been reduced to a minimum. They are adopting various measures to offset the impact of sanctions, including switching to payments in national currencies. However, this has not resolved the issue.

With several big-ticket deals, including the S-400 air defence systems and stealth frigates, under implementation, there is a large volume of payments to be made. In addition, with the war in Ukraine in its twelfth month, the Indian armed forces are feeling the pitch of not getting spares and ammunition in a timely manner from the Russians, as acknowledged by officials recently.